A stock (also known as equity) is a security that represents a part of ownership in a company, each stock has its value and the value of each stock depends on the company’s worth. a single share represents fractional ownership of a company in proportion to the total number of shares of the company. from a company perspective selling its stocks is a way to raise money without having to borrow money from a bank.
How do stocks work?
The majority of investors only own common stocks, this kind of stocks provide voting rights (every common stock gives its holder a single vote at the company’s annual shareholder meeting), the possibility to receive dividends if the company gives dividend payments, and capital growth (price appreciation). besides common stocks, there is another type of stock called preferred stocks, this kind of stock rarely gives its holder voting rights, although preferred stock generally entitles holders to receive dividends before the other company stockholders and they usually receive these dividends at a higher yield than common shareholders however common stock owners may have the opportunity to achieve higher capital gains compared to preferred stock owners. In addition to that, investors who own preferred stocks are ahead of those who own common stocks to claim assets if a company bankruptcy occurs.
Common VS. Preferred stocks:
one of the most common questions is why are stocks bought and sold and the answer is really simple: to earn money through capital gain, dividend distributions, or usually both of them, the vast majority of investors buy and own stocks in order to make a return on their investment (ROI) if the stock goes up in value, stocks can be bought or sold at any time as long as there is a buyer and a seller, most of the time when someone buys or sells a stock the company is not involved in the transaction, the transaction is only made between a stockholder willing to sell and another person willing to buy, companies initially sell their stock in something called an initial public offering or through other public offerings. from the company’s perspective selling its stocks is an approach to raising money without having to borrow money from a bank and pay interest to the bank. Each trade in the stock market is usually made through the web platform (web application) or the phone application of an online broker.
The difference between Class A and Class B shares generally resides in the number of voting rights that a shareholder is allowed to make. Class A shareholders usually have more voting rights and are mainly held by the company leaders to make sure that the voting power remains in a specific group which is more secure for the company.
Regardless of which share class you buy, you will own an equal piece of the company even though Class A and Class B shares trade at different prices because of the different market demand that each class has.
How are stocks priced?
The price of a stock is determined by the most recent transaction price at which a buyer and seller agreed to trade the stock. This price reflects the interaction of supply and demand in the market.
Several factors contribute to the pricing of a company’s shares, including supply and demand, the company’s historical performance, economic conditions, market sentiment, the news, and the overall market conditions. These factors collectively influence the price of a company’s shares in the stock market.
- Bid price: The bid price represents the maximum price that buyers in the market are willing to pay for a specific security at a given moment.
- Ask price: The ask price is the minimum price for which sellers are willing to sell their shares at a given moment.
When there is high demand and multiple buyers competing for the shares, the bid price tends to rise as buyers attempt to outbid each other to get the shares they desire, in contrast when there is an abundance of shares available for sale, the ask price tends to decrease as sellers are willing to sell for a lower price to attract buyers and dispose of their shares.
Stock Split:
A stock split, a common corporate maneuver in the financial world, involves dividing a company’s existing shares into multiple, smaller shares. This is typically executed to either bring the share price to a more accessible level or to increase the liquidity of the stock. During a stock split, shareholders receive additional shares for each share they previously owned, while the share price is adjusted proportionally. For instance, in a 2-for-1 stock split, shareholders receive an extra share for each share they held, and the stock price is halved. This action does not alter the company’s overall market valuation or the ownership percentage held by shareholders; it simply changes the number of shares and their individual prices. Stock splits are generally viewed as a positive development, making shares more affordable to a wider range of investors and potentially stimulating trading activity.
How to research Stocks?
Stock research can be approached through various methods, each providing unique insights into potential investments. Technical analysis delves into historical price trends, while quantitative analysis explores the relationships between quantitative variables. Meanwhile, fundamental analysis delves deep into the company’s core, examining financial aspects like debt, annual revenue, asset values, and payout ratios. The research process typically unfolds in several steps:
Screening: The initial step involves identifying stocks of interest.
Business Understanding: Comprehending the company’s operations, revenue sources, suppliers, and geographical location.
Financial Assessment: The financial health of the company is evaluated by considering growth rates, profit margins, financial stability, return on investment (ROI), and various financial metrics.
Stock Value: The price-earnings (P/E) ratio is examined to determine if a stock is overpriced, underpriced, or fairly priced. Higher P/E values suggest a more expensive stock, while lower P/E values indicate a cheaper one.
Platforms like Yahoo Finance are commonly used to access income statements, balance sheets, cash flow statements, and historical data.
After completing all of these steps, investors have the valuable insights required to decide whether it’s worth investing in the company or not.
